Earnings Quality among Companies with Governmental and Non-governmental Major Shareholders in Tehran Stock Exchange

The government-owned corporations can be fully or partially owned by government. In the government-based economies, thepublicly owned corporations play significant roles in capital formation, financial planning and controlling of economic issues. In such economies, the relationship between a firm and government and the level of dependency of a company to the government are considered as important factors, which affect the firm’s value. Besides, it can be stated that the government-linked companies have weak law enforcement and lack of transparency in providing information. According to the percentage of major shareholders of listed companies, it is clear that state ownership, directly or indirectly is governing the majority number of companies at Tehran stock exchange. The theoretical accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. [https://books.google.com/books? isbn=1844800296] It also provides information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for making financial decisions. In this regards, income statement is one of the financial statements that will meet these objectives. Certainly, the use of profits reported by companies is important in evaluating the performance of business units. However, the use of estimates may affect the financial statement in such a way that the reported profit is significantly different from the actual one. In such situations, earnings quality, which refers to the usefulness of earning, would be a suitable criterion to evaluate the financial health of a firm. Research Questions or Hypothesis: The quality of earnings for different groups of financial statement users especially for shareholders, investors and creditors is very important and has a significant impact on their decision. Therefore, this study investigates the differences of earnings quality level reported by companies that have public and non-public major stockholders. To this end, this study attempts to find a proper answer to the vital question of how the level of reported earnings quality varies across public and non-public companies with emphasis on their major stockholders. The earnings quality is a theoretical concept and has a multidimensional orientation. In the current study, accruals quality, earnings persistence, earnings predictability, earnings smoothing, value relevance of earnings and earnings conservatism are considered as proxies of earnings quality and are selected based on the documented literature. Accordingly, in this study one main hypothesis and six subsidiary hypotheses are stated as follows: Hypothesis: There is a significant difference between the quality of earnings reported by public and non-public companies. 1)Type of ownership significantly related to accruals quality. 2)Type of ownership significantly related to earnings persistence. 3)Type of ownership significantly related to earnings predictability. 4)Type of ownership significantly related to earnings smoothing. 5)Type of ownership significantly related to value relevance of earnings. 6)Type of ownership significantly related to earnings conservatism. Using standard multiple panel regression each hypothesis is evaluated. To do this, the quality of earning is measured by the variables that are associated to the proxies of each subsidiary hypothesis. Independent variable is a type of ownership. Firm with state ownership is defined as the company that more than 50 percent of its shares belong to government. In this study, Quasi-governmental corporations are considered as public firms. Quasi-governmental corporations are those of corporations that are initially governmental but are named as private companies. Companies, which are not governmental or Quasi-governmental, are classified as non-public firms. Dependent variable is earnings quality that is measured by its six indicators as mentioned above. The required data set is obtained from Tadbirpardaz and Rahavardnovin database and website of the Tehran Stock Exchange. Eviews (6), Stata (12) and SPSS (17) softwares are utilized to analyze the hypotheses through the collected data. Based on the sample selection characteristics, 109 companies among listed companies of Tehran Stock Exchange for the period of 2002 to 2011 have been selected; through which 63 companies became public and 36 companies were categorized as non-public. Besides, 10 companies had changed their ownership structure during the period of this study. The findings indicate that public companies with public major stockholders have a low-level quality of accruals and earnings predictability. However, the stability of earnings, value relevance and conservatism are positively associated with state ownership. In addition, it is found that there is no significant relationship between earnings smoothing and type of ownership (major stockholders). Generally, this study documents evidence on the existence of significant difference of earnings quality among public and non-public firms. It is indicated that companies with non-public major stockholders have a higher level of earnings quality as compared to public companies. Therefore, from the point of financial information users’ view, information regarding firms’ ownership and political ties will be useful to obtain better assessments of the firms’ reported earnings quality. The results of this study are in line with the findings of Zhaoming et al. (2009) and Bushman et al. (2004) that found lower level of earnings quality for firms with political connections compared to companies that have no political connections.